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BASICS OF INVESTMENTS

BASICS OF INVESTMENTS. Economic Reasons for a Project. QUESTIONS ABOUT PROJECTS:. WHY SHOULD AN INVESTMENT BE MADE IN A PROJECT? WHY SHOULD AN INVESTMENT BE MADE IN A SPECIFIC PROJECT? WHY SHOULD AN INVESTMENT BE MADE AT THIS TIME?. INVESTMENT CONSIDERATIONS.

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BASICS OF INVESTMENTS

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  1. BASICS OF INVESTMENTS Economic Reasons for a Project

  2. QUESTIONS ABOUT PROJECTS: • WHY SHOULD AN INVESTMENT BE MADE IN A PROJECT? • WHY SHOULD AN INVESTMENT BE MADE IN A SPECIFIC PROJECT? • WHY SHOULD AN INVESTMENT BE MADE AT THIS TIME?

  3. INVESTMENT CONSIDERATIONS • TECHNICAL RISK - IS THE TECHNOLOGY AT A RESEARCH, DEVELOPMENT, PROTOTYPE, OR COMMERCIALLY DEMONSTRATED LEVEL. • MARKET RISK FOR THIS PRODUCT - IS THE MARKET NEW, INCREASING, SATURATED AT THE CURRENT PRICE? • WHAT IS THE POTENTIAL FOR COMPETITIVE PRODUCTS?

  4. EVALUATION OF ECONOMIC FACTORS • NEED TO KNOW COST TO BUILD PLANT (CAPITAL COST), • COST TO OPERATE PLANT (COST OF MANUFACTURE), • COST TO FINANCE PLANT, • FINAL PRODUCT PRICE REQUIRED TO SATISFY COMPANY PROFITABILITY CRITERIA. • WHAT IS THE RISK TO MAKE THIS PROFIT VERSUS MORE CONSERVATIVE (GOVERNMENT NOTES) INVESTMENTS?

  5. OTHER RISK COMPONENTS • TECHNICAL RISK - DETERMINE CURRENT STATUS OF TECHNOLOGY BY COMPLETING A REVIEW OF ALL AVAILABLE DATA - PRIVATE AND IN PUBLIC DOMAIN - INCLUDING PATENTS. • RAW MATERIAL AVAILABILITY

  6. DEVELOPMENT OF DESIGN • DETERMINE DESIGN BASES –NEED: • PHYSIOCHEMICAL CHARACTERISTICS OF ALL BASE CASE AND ALTERNATE PROCESS COMPONENTS • ALL PROCESS CONDITIONS FOR UNIT OPERATIONS • AND ALL PRODUCT SPECIFICATIONS. • DETERMINE DESIGN CRITERIA - CLIENT SPECIFIC DESIGN REQUIREMENTS

  7. DESIGN SEQUENCE • BASIC ENGINEERING - DEVELOP FLOWSHEETS AND OTHER DIAGRAMS NECESSARY TO DEMONSTRATE PLANT CAN BE CONSTRUCTED AND TO SERVE AS A BASIS FOR DETAILED DESIGN. • DETAILED TECHNICAL DESIGN - COMPLETE AN ESTIMATE TO A LEVEL OF DETAIL NECESSARY TO PROVIDE CAPITAL AND OPERATING COST ESTIMATES ADEQUATE TO MAKE A DECISION TO PURSUE THE PROJECT. CONTINGENCY SPECIFIES THE AMOUNT OF DETAIL IN THIS DESIGN

  8. BUSINESS RISK • MARKET RISK - NOT INCLUDED IN THIS PROJECT AND REQUIRES ACTIVITY BY SALES AND MARKETING PERSONNEL. NOT INCLUDED IN THIS STUDY. • COMPLETE MARKET STUDY FOR PRODUCT - EITHER BY CLIENT OR ENGINEER, TO DETERMINE POTENTIAL ANNUAL SALES AT SPECIFIC PRICE LEVELS. DETERMINE WHAT COMPETITIVE PRODUCTS ARE AVAILABLE.

  9. TYPICAL MARKET RESEARCH • EXAMPLE FROM NET http://www.marketresearch.com/

  10. ALTERNATE INVESTMENTS • COMPARE THIS PROJECT WITH OTHER ALTERNATE INVESTMENTS - WHAT ARE RISK VERSUS RETURN VALUES • CONSIDER A PERSONAL EXAMPLE FOR IRA INVESTMENTS

  11. IRA OPTIONS (http://www.wachovia.com/)

  12. PROJECT ECONOMICS • COMPLETE CAPITAL COST ESTIMATE • COMPLETE OPERATING COST ESTIMATE • EXAMINE FINANCING OPTIONS - WHAT FRACTIONS OF THE INVESTMENT SHOULD BE BORROWED VERSUS OWNER EQUITY. • CASH FLOW - ESTIMATE THE ACTUAL CASH FLOW OVER THE LIFE OF THE PROJECT AND USE THIS TO DETERMINE THE DISCOUNTED RATE OF RETURN

  13. COST ESTIMATE DETAIL • DEPEND UPON THE DETAIL OF INFORMATION IS AVAILABLE • HOW THE RESULTS ARE INTENDED FOR USE. • REFER TO ATTACHED KE 1096 AS AN EXAMPLE

  14. DEFINITIONS APPLIED TO ESTIMATES • ACCURACY • APPLIED TO ESTIMATES AND REPRESENTS THE VALUE + THE FINAL ACTUAL VALUE, • BASED ON THE INFORMATION USED FOR PREPARING THE ESTIMATES. • CONTINGENCY • INDICATES THE COMPLETENESS OF THE FINAL DESIGN; I.E., THAT FRACTION WHICH HAS NOT BEEN SPECIFICALLY DEFINED. • CAN BE AS SIMPLE AS THE TYPE OF PAINT ON BUILDINGS, WHICH COULD SLIGHTLY INFLUENCE FINAL COSTS.

  15. INFLATION IN ESTIMATES • THE ENDLESS CIRCLE AND THE RELATIONSHIP WITH THE VALUE OF MONEY. • COMPARE ECONOMIC FACTORS IN TWO YEARS (BASED ON A VALLEY ECONOMY):

  16. INFLATION COMPARISON

  17. INFLATION CALCULATION • INFLATION RATE • CPI http://inflationdata.com/inflation/Consumer_Price_Index/HistoricalCPI.aspx?rsCPI_currentPage=0

  18. INFLATION CALCULATIONS

  19. INFLATION CALCULATIONS

  20. HISTORY OF INFLATION RATES • TO SHOW THE IMPACT OF VARIOUS EVENTS SOURCE: http://inflationdata.com/inflation/Inflation/DecadeInflation.asp

  21. FUTURE/PRESENT WORTH • INTEREST FROM AN INVESTMENT INCREASES PRESENT WORTH TO FUTURE WORTH • FOR SIMPLE INTEREST (PAID EVERY PERIOD AND NOT COMPOUNED): • P = INITIAL DEPOSIT (PRESENT WORTH) • F = FUTURE WORTH (INITIAL DEPOSIT PLUS INTEREST) • N = NUMBER OF PERIODS • i = SIMPLE INTEREST RATE PER PERIOD

  22. DISCRETE COMPOUNDED INTEREST • INTEREST EARNED ON INTEREST

  23. EFFECTIVE/NOMINAL INTEREST RATE • DISCRETE INTEREST RATES • INTEREST PER PERIOD: i • NOMINAL ANNUAL INTEREST: r • m = NUMBER OF PERIODS PER YEAR • EFFECTIVE ANNUAL INTEREST:

  24. CONTINUOUS INTEREST • CONTINUOUS COMPOUND AMOUNT FACTOR • EFFECTIVE INTEREST RATE

  25. INFLATION IMPACTS • INFLATION DECREASES FUTURE WORTH ON NONINVESTED MONEY: WHERE ƒ = EFFECTIVE INFLATION RATE PER PERIOD • FOR COMPOUNDED INVESTMENTS:

  26. DISCOUNTING • CONVERTS FUTURE VALUES TO THE PRESENT VALUE • IS THE INVERSE OF COMPOUNDING • FOR COMPOUNDED INVESTMENT • COMPOUND DISCOUNT FACTOR

  27. CONTINUOUS DISCOUNTING • PRESENT WORTH EQUATION • CONTINUOUS DISCOUNT FACTOR

  28. SERIES DEPOSITS • DISCRETE INVESTMENTS FUTURE WORTH EQUATION (SCAF) • CONSTANT ANNUAL CASH FLOW FUTURE WORTH (CCAF)

  29. SERIES PRESENT WORTH • DISCRETE INVESTMENTS • CONTINUOUS CASH FLOWS • SEE TABLES 7-3, 7-4 AND 7-5 FOR COMPILATION

  30. SERIES APPLICATIONS • MORTGAGES – LOANS FOR HOMES • WHERE P0 IS THE INITIAL AMOUNT, L IS THE PAYMENT EACH PERIOD, r IS THE NOMINAL INTEREST RATE, m IS THE NUMBER OF PERIODS EACH YEAR , n IS THE NUMBER OF YEARS

  31. SERIES APPLICATIONS • ACCUMULATION OF FUNDS FOR A SPECIFIC PURPOSE; DOWN PAYMENT, RETIREMENT, COLLEGE EDUCATION, et. al.

  32. PERSONAL INVESTMENT EXERCISE • EACH STUDENT IS TO INVEST $50,000 IN THE STOCK MARKET FOR THE DURATION OF THE CLASS. • STUDENTS MAY SELL AND BUY STOCKS ONCE EACH WEEK DURING THE SEMESTER • THE FINAL WINNER WILL HAVE THE MOST CASH AFTER SELLING THE STOCK NO LATER THAN THE LAST DAY OF CLASS

  33. PI EXERCISE TRANSACTIONS • ALL STUDENTS START WITH A TOTAL OF $50,000 IN CASH (VIRTUAL) • BUYS/SELLS • STUDENTS MAY HOLD UP TO 3 STOCKS AND CASH AT ANY POINT IN TIME • A 1% SALES COST IS ATTACHED TO EACH BUY AND SELL TRANSACTION • NO MORE THAN 3 BUY/SELL COMBINATIONS ARE ALLOWED IN EACH WEEK • CASH POSITIONS ARE ALLOWED AT ANY TIME

  34. PI EXERCISE RECORDS • ALL STOCKS MUST BE LISTED ON US EXCHANGES WITH VALUES > $1/SHARE • EACH STUDENT WILL GO TO THE YAHOO FINANCE PAGE AND CREATE A PORTFOLIO TO TRACK THE STOCKS – USE YOUR INITIALS FOR THE NAME OF THE FILE • A PRINTOUT OF THE PORTFOLIO STATUS IS TO BE SUBMITTED EACH FRIDAY, WITH A SUMMARY OF ANY ACTIVITY COMPLETED DURING THE WEEK; e.g. • SOLD 500 SHRS OF STOCK A @ $10, SALES COST = $50 • PURCHASED 400 SHRS OF STOCK B @ $5, SALES COST = $20 • $3000 INTO CASH INVENTORY

  35. PI EXERCISE SOURCES • STUDENTS CAN USE ANY SOURCE OF INVESTMENT INFORMATION AVAILABLE TO ALL STUDENTS, SUCH AS: • CORPORATE ANNUAL REPORTS • STOCK RECOMMENDATIONS ON THE NET • STOCK RECOMMENDATIONS AT THE LIBRARY, VALUE LINE™ • STUDENTS WORK AS INDIVIDUALS

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